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BofA upgrades Vodafone Idea rating to ‘Neutral’ on tariff hike leverage, lifts price target to ₹14.5

In a recent report, global brokerage firm BofA upgraded its rating on Vodafone Idea from ‘underperform’ to ‘neutral’ as the brokerage finds VIL offers the highest leverage for tariff hike (5% ARPU increase leads to 12% EPS increase).

Moreover, the brokerage pointed out that the recent fundraise by the company is expected to enhance its 4G network coverage, which could mitigate market share declines and enhance competitiveness.

However, despite these positive aspects, the brokerage refrains from recommending VIL as a buy. This decision is based on the need for further clarity regarding the improvement in the funding position post-FY26, especially as the spectrum moratorium concludes.

BofA has adjusted its EPS estimates for FY 25/26 to ₹(2.7) and (1.5), respectively, factoring in the recent capital raise. The brokerage has also revised its price target upward to ₹14.5 per share from the previous target of ₹9.4 per share.

BofA underscores a growing optimism toward the momentum in the telecom sector. The brokerage now anticipates a potentially higher magnitude of tariff hikes, ranging between 20% and 25%, compared to its earlier projections of 10% to 15%.

This upward revision is attributed to improving cash flows, which telecom companies are expected to channel into expanding high-margin segments such as fibre broadband, enterprise services, and data centres.

Additionally, there is a consensus among telecommunications companies to avoid disruptive pricing strategies, contributing to market stability. Another pivotal event on the horizon is the potential IPO of Reliance Industries Limited’s (RIL) telecom arm, Jio, a development that has been previously hinted at by RIL management.

BofA’s bullish outlook on higher tariff hikes is driven by the industry’s collective willingness to implement them. Moreover, consumer receptivity to a 20% to 25% hike is expected to be favourable, given the limited alternatives and increasing reliance on data services. Continued government support further bolsters this sentiment.

Further, potential investments in data centres to leverage AI-driven opportunities are on the horizon. BofA suggests that tariff revisions may occur post-general elections, with the expectation that consumers will absorb the increase well.

Also Read: Coming up in FY25: Tariff hikes, 5G monetization and VI 2.0

If this adjustment is successful, there is a higher likelihood, according to BofA, of another tariff hike within the next 12 months as telecom companies seek to capitalise on their 5G investments. Livemint

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